Recent amendments to the Bear Stearns Rule have extended this subsidy to Fannie and Freddie. The Basel Committee decided to include the debt of “Government Sponsored Entitites”—bureaucratic code for Fannie and Freddie—in the definition of “high quality liquid assets.” What’s more, it also included mortgage-backed securities guaranteed by Fannie and Freddie in the definition.
In truth, Basel III is all about this forcing of banks into government paper of one sort or another. Thus, squeezing out private sector debt borrowing, creating huge moral hazard and making the global system even more vulnerable and top heavy with junk.
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